As ethanol production has become an important component of corn demand, the link between corn prices and crude oil prices has become “quite strong,” says Mississippi State University Economics Professor John Anderson.
“If you look at price charts for December corn and crude oil, they look basically the same.”
And even though corn prices have fallen sharply along with oil prices, he said at the annual meeting of the Mississippi Agricultural Economics Association, “I think what we’re seeing in the market is the expectation this is a long-run situation, and it will be difficult to build stocks in this environment of strong corn demand.
The corn stocks-to-use ratio is now below 10 percent, Anderson says.
“We’ve been that low before, in the 1970s and mid-1990s, but there’s a marked difference in the price of corn between then and now. Every previous corn price record has been completely wiped out this year, with corn prices on some futures contracts exceeding $8 per bushel.”
Renewable energy has been a major national topic as oil prices moved higher, topping out at more than $140 per barrel, Anderson notes. But it has been less in the forefront in light of the worldwide financial crisis.
The Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 increased the mandated levels of ethanol production, based on the Environmental Protection Agency’s projections of gasoline production.
The 2007 act stipulated “a very significant step up” to 9 billion gallons of ethanol for 2008, or 7.8 percent of gasoline production. In 2009, the mandate is for 10.5 billion gallons of non-cellulosic ethanol and .2 billion gallons of cellulosic ethanol.
U.S. ethanol production has been “well above levels established in the legislation,” Anderson says.
But it wasn’t all gravy for ethanol producers. “Higher corn prices put a squeeze on them. As long as oil was going higher, they could deal with higher corn prices. When oil started falling, though, their profits were adversely affected and the value of their stock dropped dramatically. Ethanol producer Archer Daniels Midland, a very diversified company, took a significant hit on its stock.
Over time, Anderson says, “I feel the Renewable Fuels standard will support corn for ethanol, even as corn prices increase. This will likely mean more rationing of corn from other users, such as livestock producers and export customers, in response to the higher prices.”
In 2004-05, 12.4 percent of the U.S. corn supply went to ethanol; in 2008-09, it is projected at 31.8 percent.
The uncertainty of the corn supply has potential important effects on the feed, export, and ethanol sectors, Anderson says.
“If there is any corn supply shock, the effect of the renewable fuels mandate on price — particularly in the livestock sector — can be considerable.”
Public acceptance of ethanol/gasoline blended fuels may also be a factor in production and usage going forward.
“According to the Department of Energy, ethanol has only two-thirds the energy yield of gasoline,” Anderson says. “E10 ethanol/gasoline blend has 3.3 percent less energy content than regular gasoline.
“Most consumers probably won’t notice the difference in performance with an E10 blend, but at E20 and higher they are likely to begin to notice.”
Oil companies are also sending different messages about ethanol, Anderson notes.
“Some gas pumps have stickers that say, ‘No ethanol in our gas,’ while others say, “Enriched with 10 percent ethanol.’ So, the marketing approach is not consistent.”